Premier Inn owner Whitbread PLC (LON:WTB) has been upgraded by one set of analysts as UK business confidence improves, while coronavirus was seen as creating sizeable risks and investment opportunities.
The analysts said the Wuhan coronavirus is a potential threat, but felt in most cases “risks are often baked into share prices” and that looking back at the SARS epidemic in 2003, the overall impact on European equities “was limited” compared to the impact on those in Hong Kong.
While the current share price of global operator InterContinental Hotels Group PLC (LON:IHG) imply that revenue per available room (revpar) for 2020 will fall by 7.3%, according to HSBC's calculations, Whitbread's share price implies that revpar will see only a “muted” effect given its UK domestic focus,
“Still, there may be an impact and we estimate that group revpar would have to deteriorate from our current assumption of -1.2% to -7.8% to justify the current share price,” the analysts said.
READ: Whitbread's underlying revenue dips as provinces stay weak
Earlier this month Whitbread investors were disappointed by a third-quarter update that showed negative like-for-like (LFL) sales growth were accompanied by rising costs and further planned investment.
The good news, HSBC’s analysts said, was that the trends in UK revpar appear to be “turning the corner”.
“The declines have been driven by weakness in business spend and if UK investment starts to pick up, it could potentially turn more positive as calendar year 2021 wears on.”
With optimism on German expansion increasing, the analysts upgraded to ‘buy’ from their previous ‘hold’ rating, with their target price hiked to 5,200p from 4,600p.
Barclays sees coronavirus creating “entry point”
In another note on the leisure sector on Wednesday, Barclays analysts saw risks for Whitbread and fellow hotels group IHG from the coronavirus outbreak, but also opportunities from an investment point of view.
Said the analysts: “History indicates that after events like this there is a full recovery within a year, and we would expect the same to materialize here so we think long-term investors should view the share price weakness as presenting an interesting entry point.
“However, the short-term performance can get ‘a lot worse’ before things recover.”
Estimating the result of a range of possible scenarios, Barclays said a severe global impact would see 2020 EPS risk of 14% for IHG and 5.5% for Whitbread under a scenario where the impact moves from a mostly Chinese travel slowdown to a global one.
Analysts said “we would buy Whitbread here” and reiterated their ‘overweight’ rating given the group’s “limited exposure to the risks” but disappointing third-quarter release and cost-led downgrade.